Modest Growth Pickup in 2013, Projects IMF

Emerging markets, developing countries, United States, main sources of growth

Global growth will strengthen gradually in 2013, says the IMF in an update to its World Economic Outlook (WEO), as the constraints on economic activity start to ease this year. But the recovery is slow, and the report stressed that policies must address downside risks to bolster growth.

Policy actions have lowered acute crisis risks in the euro area and the United States, the report noted. Japan’s stimulus plans will help boost growth in the near term, pulling the country out of a short-lived recession. Effective policies have also helped support a modest growth pickup in some emerging market and developing economies. And recovery in the United States remains broadly on track. Global growth is projected to strengthen to 3.5 percent this year, from 3.2 percent in 2012—a downward revision of just 0.1 percentage point compared with the October 2012 WEO.

If crisis risks do not materialize and financial conditions continue to improve, global growth could even be stronger than forecast, the report said. But downside risks remain significant, including prolonged stagnation in the euro area and excessive short-term fiscal tightening in the United States.

Modest improvement in conditions

The report observed that economic conditions improved slightly in the third quarter of 2012, driven by performance in emerging market economies and the United States. Financial conditions also improved, as borrowing costs for countries in the euro area periphery fell, and many stock markets around the world rose. But activity in the euro area periphery was even softer than expected, with some of that weakness spilling over to the euro area core. And Japan moved into recession in the second half of last year.

Forecasts broadly unchanged, except for euro area

The IMF downgraded its near-term forecast for the euro area, with the region now expected to contract slightly in 2013. The report observed that even though policy actions have reduced risks and improved financial conditions for governments and banks in the periphery economies, those had not yet translated into improved borrowing conditions for the private sector. Continuing uncertainty about the ultimate resolution of the global financial crisis, despite continued progress in policy reforms, could also dampen the region’s prospects.

The IMF forecasts growth of 2 percent in the United States this year, broadly unchanged from the October 2012 WEO. A supportive financial market environment and the turnaround in the housing market will support consumption growth. The near-term outlook for Japan is also unchanged despite that country’s slipping into recession, because the stimulus package and further monetary easing will boost growth. Emerging market and developing economies are expected to grow by 5.5 percent this year, broadly as predicted in the October 2012 WEO.

Policies must urgently address risks

The report noted that the euro area continues to pose a large downside risk to the global outlook. While a sharp crisis has become less likely, “the risk of prolonged stagnation in the euro area would rise if the momentum for reform is not maintained,” the IMF said. To head off this risk, the report stressed, adjustment programs by the periphery countries need to continue, and must be supported by the deployment of “firewalls” to prevent contagion as well as further steps toward banking union and fiscal integration.

For the United States, the IMF stressed that “the priority is to avoid excessive fiscal consolidation in the short term, promptly raise the debt ceiling, and agree on a credible medium-term fiscal consolidation plan, focused on entitlement and tax reform.” The report also emphasized the importance of a credible medium-term fiscal strategy in Japan. Without it, the IMF cautioned that “the stimulus package carries important risks. Specifically, the stimulus-induced recovery could prove short lived, and the debt outlook significantly worse.”

For emerging market and developing economies, the report underscored the need to rebuild policy room for maneuver. It noted that “the appropriate pace of rebuilding must balance external downside risks against risks of rising domestic imbalances.”

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